Cancelling Sunday Dinner

Cusick’s CornerCommentary by Joe Cusick – December 27, 2012 We now have headlines that House will be meeting on Sunday at 6:30pm, so some traders might be cancelling those dinner plans that night. But let’s put some context to all this action.

First, we need to look at the volume and it has been light the last few days, so it does not feel like the big holders are bailing in front of the “cliff”. Second, if you look at the year-to-date % change, Financials have improved 24%, so with the growing uncertainty some weaker hand longs might be taking some profits after an impressive year. Last, the market continues to challenge key support, 1400 on the S&Ps, and has held to this point. Be mechanical when dealing with the current environment. In other words, look at your holdings, asses where they are since entry and take “stock” (figuratively), strategically tie either some sort of defense, i.e. puts, or sell into strength if nervous or just sit back and watch.

Market Recap

Stock market averages fell sharply through midday, but then rebounded in dramatic fashion in afternoon trading. Headlines related to unfolding budget negotiations continue to drive the volatility and stocks moved broadly lower this morning after Senator Harry Reid said that it’s too late to avoid going off the fiscal cliff. However, later, market averages rebounded on reports that House Speaker John Boehner stands ready to sign off on what the Senate passes. The ongoing posturing is expected to continue until a deal is reached and, if so, we can expect to see more headline-driven market swings in the days ahead. Light seasonally low volumes are perhaps exacerbating the volatility due to thin trading. The day’s other economic news was mixed. Weekly Jobless Claims were down to 350K for the period ended 12/22, from 362K and much better than the 375K that was expected. However, the latest Consumer Confidence Index for December sank to 65.1, from 71.5 and well below expectations of 70. Elsewhere, stock market averages saw quiet trading across the Eurozone and Japan’s Nikkei rose another .9 percent. Crude oil edged up 14 cents to $91.12 and gold gained $5 to $1665.7. On Wall Street, the Dow Jones Industrial Average trimmed its loss to only 20 points and finished 130 points off session lows. The NASDAQ dropped 4.3 points.

Today’s Bullish Trading

Forest Oil (FST), a Denver, CO oil and gas company, lost 7 cents to $6.61 and is on a five-day 8 percent losing skid. Some investors are possibly bracing for a rebound, as 8,445 calls and 511 puts traded on the stock today. May 8 calls, which are 21 percent out-of-the-money, were the most actives. 5,182 contracts traded against 118 in open interest. The top trade was a 700-contract block for 60 cents per contract when the market was 55 to 60 cents. January 6 and February 8 calls on Forest Oil also saw interest and 30-day implied volatility in FST options was up 8 percent to 61.

Bullish trading was also seen in Nordstrom (JWN), Sandridge Energy (SD), and Newmont Mining (NEM).

Today’s Bearish Trading

Gannett (GCI) drops 25 cents to $17.91 and options volume on the McLean, VA newspaper publishing company was 7.5X the daily average, with 8,911 puts and 739 calls traded in the name. Much of the flow was concentrated in February 17 puts and included a 3400-contract block for 78 cents per contract when the market was 70 to 80 cents. At the end of the day, 7,849 contracts traded against 0 in open interest. It’s not clear what was motivating the activity, as there have been no obvious headlines on the ticker lately. Yet, implied volatility in GCI options was up 10 percent to 31.5 and some investors are possibly opening put positions on concerns about a drop in the stock between now and mid-February.

Bearish trading was also seen in Travelers (TRV), Knight Trading (KCG), and Assured Guaranty (AGO).

CBOE Volatility Index (.VIX) had a roller coaster day Thursday. The index, which was up 1.32 points the day before, opened at 19.39 and slipped to 19.18 in morning action. From that point forward, the index started a rather steep ascent before hitting 20.9 midday and its highest levels since late-July – when it briefly touched 21 on 7/24. However, the gains didn’t hold and VIX started falling in the second half of trading. At the closing bell, VIX was down .16 to 19.32 and 8.2 percent from session highs. VIX tracks the expected volatility priced into the S&P 500 Index (.SPX) options. So, not only are fiscal cliff headlines driving roller coaster action in the stock market averages, they seem to be having a substantial impact on activity in the options market as well.

Analyzing the ETF Market

After several days of light volume, a flurry of activity surfaced in the SPDR 500 Trust (SPY) Thursday. Shares ended a volatile trading session down 19 cents to $141.56. Trading was a heavy 160.9 million shares. Meanwhile, 1.2 million calls and 2 million puts traded on SPY. Weekly 141 puts (that expire on Friday, Jan 4), were the day’s most active options contract. 146,663 contracts traded. The December Quarterly 141 puts, which expire on Monday, Dec 31, were the second most actives. 111,476 contracts changed hands. Some investors were possibly taking positions in these downside near-the-money short-term put options on concerns about further losses for the S&P 500 in the days ahead. SPY is an exchange-traded fund that holds the same names as the S&P 500 Index.

Joseph Cusick is currently Vice President of Wealth and Asset Management at MoneyBlock. Joseph is passionate about marrying his 20 years of market experience and the powerful tools at MoneyBlock with the goal of empowering wealth managers with the tools to better manage and grow their business. Joseph was previously the Senior… read more

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